Monday, October 29, 2007

Our Taxes are Bass-Ackwards

At least when it comes to income taxes. We are a system supposedly of federalism, with at least a tacit recognition that local government is supreme in the sense that you have more control over local officials (and they are thus more responsive to you) because you live in the same community and also your vote counts far more for local elections than statewide or national ones.

Why is it, then, that when it comes to taxes, those officials with the least ties, the Federal, get most of the taxes?

Shouldn't it be the other way around? Shouldn't the 10% to 35% or whatever brackets of income tax be the taxes paid to your local township and the 0.5% or 1% be that paid to the federal government (with the state still in between there with maybe a 4% income tax, if any)? That would be a much better system, IMHO - then you would have much more control over how your tax dollars were spent. Then those stupid federal mandates for local governments would actually make a bit more sense (though I still think they are stupid).

Wouldn't it be wonderful if you could be the one vote out of a few hundred or a few thousand that decides the fate of elected officials that spend your money instead of being one face in millions that is usually totally ignored?

Why should we send most of our money to some far off government and only a tiny amount to our local communities? That is just backwards to me. (Of course, there are property taxes, but that is a different discussion).

I'd like a constitutional amendment limiting federal income tax to, say, at most 25% of state income tax and limiting state income tax to, at most, 10% of city income tax. You don't need a limit on the city income tax because if that gets too high those city officials will be out on their asses come the next election. And you will know where they live (and it may even be next door to you).

Accountability would be so much higher. And we would get de-facto federalism back.


Anonymous said...

Initially I would like to agree, but there are far more services from the federal level than from the local level, right? Military, Social Security, Secret Service, FBI, CIA, NSA, IRS, NASA, FEMA, FDA, etc... Not to mention Universal Healthcare when it becomes available (yup, I'm a Canadian in the US).

Besides, there are just as many idiots (if not more) at the local level as there are at the Federal level, IMHO. :D

DBB said...

Sure, there are idiots at all level - but the point is that the idiots at the local level have to be much more responsive to a much smaller pool of constituents.

And perhaps there would be a lot less alphabet soup at the federal level as a result - which in some cases would be a good thing. Certainly the IRS would not need to be nearly as large.

Many services could be handled locally - and again, since your local officials have the purse strings, you'd have much more control over what those were.

Corruption would be less of a worry - part of what makes DC corrupt is you have a handful of people controlling the purse strings for the entire nation - hundreds of billions of dollars. At the local level, the total money would be far less and the control would be far more, so there is less room for corruption. Billions can't just disappear at the drop of a hat from your local community - someone would notice. :) And those officials would not only be out of office, they'd be in jail.

ballgame said...

Ideally, the scope of the taxing authority should be as large as the economy. Otherwise you end up with the little governments ending up in a 'race to the bottom' as they get into a reverse bidding war with other local governments in lowering taxes to lure capital investment. Ultimately you end up with the 'private wealth, public squalor' that Galbraith so trenchantly highlighted.

This 'get localities to compete with each other for investment' is, I believe, one of the two main impetuses for all of the 'free trade' agreements that have devastated the blue collar segment of the American economy over the past couple of decades and kept real hourly wages largely flat despite tremendous increases in productivity. (The other impetus being, of course, cheap foreign labor.)

DBB said...

Where people live isn't just about capital investment - one of the main reasons people pick an area to live in is for the local schools - and those are paid for with tax money.

People also get used to where they live and are reluctant to move (plus moving does cost money). So it is not like there will be a huge mass exodus from community competition - just like even though there is technically employment at will, people are reluctant to move jobs unless they really hate their current job. Better the devil you know, etc. That's part of the reason wages are below market in the sense that normal market forces can't operate on wages like they can in other areas because people won't necessarily change jobs just because they are underpaid due to other factors.

But now I've really digressed.

Ballgame - are you essentially arguing that we have to have taxes in a far off, mostly unaccountable government or else people won't set taxes that high? Who is to say that people won't be happier with even higher taxes, knowing that they have much more control over how much they are taxed and how that money is spent (and because that money would then probably be mostly spent locally, benefiting the local taxpayers more directly).

I remember there was a student activity fee I had to pay in undergrad - just a flat fee - and then there was another one for my dorm, another flat fee. The dorm fee you could then allocate to the various student organizations in the dorm. Nobody I talked to was upset about that - because it was a 'tax' that was paid locally and we could see directly who got the money and we fairly directly benefited. In fact, one small group I was in ended up with some money from that.

To me, it is about accountability. Your fear of a 'race to the bottom' is probably a bit overblown - think about it - if the system really were that way, then people would have hardly any taxes at all outside of the local ones. So I don't think you'd see a lot of localities feeling they had to drop tax rates to zero. As it is, many localities are reluctant to even levy a 1% income tax because people already see upwards 50% of their income taken by various taxes.

Plus, people are not totally irrational - if you know your roads won't be fixed without taxes, you'll vote for those taxes.

What it will eliminate entirely is pork barrel type projects that cost millions and millions (or billions) of dollars. No politician could siphon that much money out of a local community for a pet project thousands of miles away. And if it was a local project, either there is enough support in the community for it (like the 'bridge to nowhere') to tax and pay for it from the community, or it won't get built.

hedera said...

Sorry, DBB, but you clearly show that you are not from California. Do a little research on the history of California's proposition 13. Do a little research on the late unlamented Howard Jarvis and his anti-tax movement.

There is a very well funded and vocal libertarian minority that doesn't believe it should pay any taxes at all. These are the people who conned California into passing a requirement for a 2/3 majority for bond issues and tax increases, even in local jurisdictions. Some jurisdictions haven't passed either of those in decades. Our public school system is in the bottom 5 nationwide, but they don't want to pay for it - their kids are in private school, or they don't have kids. Our infrastructure is falling over and there's no cash to fix it, all because a group of people that is 5 larger than 1/3 of the voters in any given election can block tax increases and bond measures. I hate to tell you how many solid local proposals I've seen fail with 64% of the vote.

I'm sorry, after watching the last 40 years in California, your assumption that people will pay taxes for local projects they approve of just appears - naive.

DBB said...

Hedera - That's pretty messed up - but then that isn't just about locals, that is about a minority of locals blocking the majority. I did not suggest supermajorities. I wonder how many people would still block things like that if they knew there was no federal money to be had, though.

I do not suggest allowing minorities to control the purse strings like that. That sounds pretty crazy to me.

ballgame said...

Where people live isn't just about capital investment - one of the main reasons people pick an area to live in is for the local schools...

... which IMHO is insane. Not the motivation, mind you. The impulse parents have to see that their children get a quality education is highly commendable. What IS insane, though, is a system whereby some children get significantly and demonstrably superior educations than others because the area in which their school is located is wealthier. An educational caste system is unacceptable in an egalitarian society.

Ballgame - are you essentially arguing that we have to have taxes in a far off, mostly unaccountable government or else people won't set taxes that high? Who is to say that people won't be happier with even higher taxes, knowing that they have much more control over how much they are taxed and how that money is spent (and because that money would then probably be mostly spent locally, benefiting the local taxpayers more directly).

Strictly speaking, I'm arguing that we have to have taxes in a far off government — I certainly don't concede that it has to be unaccountable — or else a locality that has decided to fund a high level of public services through higher taxes will be compelled to lower those taxes by the threat or fact of having their local economy grind to a halt because of disinvestment. It's all very well to say that taxes set locally permit greater democratic (i.e. less corrupt) control over those taxes than ones set far away ... but that control rings rather hollow when there ends up being nothing to tax.

Just take a look at the other side of the coin and see what local 'control' has had on the spending side of the equation when it comes to welfare reform. States realize that if they raise the level of welfare benefits above the draconian, they may be faced with an influx of poor people from other states. They are, in essence, thrust into the role of competing to minimize the attractiveness of their state to those without money. Some states have tried to raise their welfare levels to a more humane level and to dampen the impact of luring poor people from other states by setting minimum residency requirements to qualify for welfare benefits. Since those residency requirements were struck down by the Supreme Court, states now raise welfare benefits at their own peril.

The 'local control' afforded to states in the arena of welfare is largely illusory, as would be a 'locally controlled' tax structure. The dynamic of competing with other states to minimize the attractiveness of your state to poor people (in the case of welfare benefits) or maximize the attractiveness of your state to rich people (in the case of taxation) will override whatever egalitarian impulse your locality might have and all the 'locally controlled' localities will end up with a substantially similar tax structure, one that (surprise!) goes rather easy on people who have a lot of money.

Now dbb, I'm entirely sympathetic to your desire to have greater accountability in our governmental structure. The problem with pork barrel projects, though, is not primarily due to our having national representatives set up how we tax and spend ... it's more due to those representatives being elected locally. If we had truly national parties with proportional representation instead of having 50 + 435 'local' parties, there would be a powerful counterforce against excessive and idiotic 'pet projects'.